Interest Paid to HUDA on Delayed External Development Charges Not Penal, Deductible as Revenue Expenditure: ITAT [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that interest paid to the Haryana Urban Development Authority (HUDA) on delayed payment of External Development Charges (EDC) is not penal in nature and is allowable as revenue expenditure.

The Assessing Officer had disallowed interest of ₹5.47 crore on the ground that it represented a penal levy and should be capitalised as part of project cost.

On appeal, the Commissioner (Appeals) allowed the deduction, following earlier decisions in the assessee’s own case as well as rulings in Triveni Ferrous Infrastructure Pvt. Ltd. and Ferrous Township Pvt. Ltd..

The Revenue challenged this before the Tribunal, arguing that interest on EDC was penal and related to project costs.

However, the ITAT noted that the issue was already settled in earlier years, where it had been held that such payments arise out of contractual obligations with HUDA and are compensatory in nature, not penal.

The Tribunal observed that since the interest related to outstanding EDC for projects already completed and sold, it could not be added to work-in-progress. Instead, it was revenue expenditure incurred during the relevant year and deductible in computing business income.

The bench of Manish Agarwal and Madhumita Roy dismissed the Revenue’s appeal and upheld the order allowing the deduction holding that interest paid to HUDA on delayed EDC payments is deductible.

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